Update Regarding Marketing Services Agreements ("MSAs")

CFPB RESPA

On Thursday, June 30, 2015, a CFPB spokesman issued a statement to HousingWire in response to the announcement by a large lender that it was terminating its MSAs:

[This] decision to exit all marketing services agreements is an important step for the mortgage industry towards ensuring compliance with [the Real Estate Settlement Procedures Act (“RESPA”)] and freeing up more choices for consumers.  We are concerned that such agreements can carry significant legal risk for companies and undermine transparency for consumers.  Companies should take note of today’s action and consider carefully whether their own business practices comply with the consumer protections provided under the law, which bars kickbacks for customer referrals.

These announcements come in the wake of the CFPB’s September 2014 consent order against Lighthouse Title, Inc. and CFPB Director Cordray’s June 2015 ruling against PHH Corporation and its affiliates. Both matters involved alleged violation of Section 8 of RESPA, which states that “[n]o person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.” 12 U.S.C. § 2607(a). However, Section 8 also states that “[n]othing in this section shall be construed as prohibiting … the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.” 12 U.S.C. § 2607(c)(2). 

In the Lighthouse order (at ¶ 20), the CFPB stated that “[e]ntering a contract is a ‘thing of value’ within the meaning of Section 8, even if the fees paid under that contract are fair market value for the goods or services provided.”  This statement raised concerns that, notwithstanding Section 8(c)(2) which market participants have believed for decades permitted MSAs and similar arrangements so long as the payments were fair market value, the CFPB believed a MSA violated RESPA if its “true purpose” was the referral of settlement services, regardless of whether fair market value was paid in exchange for actual marketing services.

Director Cordray’s opinion in the PHH appeal appears to confirm these concerns. The opinion repeatedly states that payments for services are only “bona fide” under RESPA § 2607(c)(2) if they “are solely for services actually performed (i.e., not for referrals)….”  CFPB PHH Opinion at 18; see also id. at 17 (“[T]he distinct meaning of ‘bona fide’ in section 8(c)(2) is that the payment must be solely for the service actually being provided on its own merits, but cannot be a payment that is tied in any way to the referral of business.”); id. (“A payment made ‘in good faith’ for services performed is made for the services themselves, not as a pretext to provide compensation for a referral.”).  In reaching this result, Director Cordray rejected guidance provided by HUD in a 1997 letter “[t]o the extent … inconsistent with [his] textual and structural interpretation of [RESPA].”  Id. at 17 (stating that “[t]he HUD letter is not in such a form as to be binding on any adjudicator” because it was not published in the Federal Register and therefore “provides no protection to PHH in this proceeding”).

But the CFPB faces additional challenges if it were to take the position that MSAs generally are per se impermissible in light of the fact that, unlike the 1997 letter regarding captive reinsurance, HUD published guidance in the Federal Register in 2010 regarding the marketing of home warranty companies (the “HWC Guidance”) that “may be applicable to payments made by other settlement service providers to real estate brokers or agents.”  HWC Responses, 75 Fed. Reg. 74620, 74621 (Dec. 1, 2010) (question 7).  Among other things, the HWC Guidance concludes that the interpretive rule does not “prohibit payments from an HWC to real estate brokers or agents for general advertising services performed by the brokers or agents on behalf of the HWC[.]”  75 Fed. Reg. at 36272-73. The HWC Guidance uses the following example to illustrate this conclusion:  “a reasonable payment for an advertisement by an HWC in a real estate broker's or agent's publication or on the broker's or agent's website would not, in and of itself, be a payment for a referral under RESPA.”  Id.

The PHH decision is being appealed to the U.S. Court of Appeals for the D.C. Circuit.